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Business 673 Investment Management Fall 2011

Instructor: Dr. Ben A. Adu Office: E-Mail: Faculty Assistant: P3070 bamoako@wlu.ca Marjana Bilandzic SBE2230, Ext. 2542 7:00-10:00 p.m. SBE2260

Phone: 884-0710 Ext. 2327 Office Hours: Tuesday: 6:00 pm 7:00 pm --and by appointment --

Class Period: Classroom:

COURSE DESCRIPTION: This investments course is designed to help students understand the investment opportunities in the capital markets and the risk-return relationship of securities usually included in investment portfolios. The bond market, stock market, fundamental analysis, portfolio analysis, mutual funds, as well as market efficiency are the focus of this course. Some financial derivative securities, for example, options and stock index futures, which are used for hedging against market risk, will be introduced in the course to help students hedge their simulation portfolios. The course will also cover investment risk, trading strategies and technical analysis. Students will undertake a ten-week Laurier (BETA) stock market competition on the Toronto Stock Exchange, the Montreal derivatives market, and the Canadian bonds market starting on Monday, Sept. 26, 2011 and ending on Thursday, November 25, 2011. A 15-page report (plus one extra page of Executive Summary) on their trading strategies and portfolio performance should be prepared and submitted to me at the last day of class. See Appendices A & B for the rules and additional information on the trading simulation. Register at the website <http://invest.wlu.ca/mba>.Observe the additional trading rules at the invest website. A rule requires that, to earn the trading prize from the national competition, the winning group should have invested in each major asset class (stocks, bonds, options, and index futures). GROUP WORK: Students will form groups to trade in securities and manage their portfolio in the stock market competition. Each group would comprise two students. The group will be assigned one access code which they will use to place their trading orders. All the group members are responsible for their trading decisions as well as the preparation of the final trading report. The same group will be responsible for the take-home midterm examination. For the mid-term, each group will submit one set of solutions and the members of the group will be assigned the same mark that the group earns. I expect all students in each group to participate and share the assignment burden equally. If there are any problems within a group, the members should inform me before the group assignment hand-in (not after grading). Though there will not be within group variation in assignment of marks, any student who fails to fully participate and co-operate with the group members in either the stock market simulation or take-home midterm, will be assigned only one-half of the mark earned by the group.

BU673

Fall 2011 Course Outline

REQUIRED TEXT: Investments: Seventh Canadian Edition, by Z. Bodie, A. Kane, A.J. Marcus, S. Perrakis, P.J. Ryan (BKMPR); McGraw-Hill Ryerson, 2008. Solutions Manual of this textbook is available to the students through my teaching website. The password will be given in class. BU673 Course Package prepared by Professor Ben Amoako-Adu is available at the MBA office for about $17.02 or on my SBE teaching web site. The login and password will be provided to students on the first day of class.

GRADING SCHEME: Mid-term Exam (Take-home) Trading Simulation and Report Final Exam

30% 30% (Performance 15% + Report 15%) 40% 100%

COURSE OUTLINE

TOPIC 1. INTRODUCTION -Investment Goals and Simulated Trading Techniques -Investment Objectives -Asset Allocation Principles -Strategy for Picking Stocks -Markets and Instruments (Historical Record) -How Securities are Traded -Provincial vs. National Securities Agency

BKMPR Chapter

Case: Canadian National Securities Agency 2. TAXATION OF INVESTMENT RETURNS -Taxation of Interest Income -Taxation of Dividends -Capital Gains Taxes (Inclusion Ratio) -Pre-tax Dividend compared to Pre-tax Interest Income

http://invest.wlu.ca/mba 1 Course Package Course Package 2 and 4 3 Case in Course Package, and www.wise-averties.ca www.expertpanel.ca Course Package Appendix 22A pp.849 - 854 Course Package

Course Package

3.

SECURITY MARKET EFFICIENCY -Weak Form and Random Walk -Semi-Strong Form and New Public Information -Strong Form, Insider Trading Rules & Legal Implications -Thin Trading on TSE and Other Provincial Exchanges -Stock Market Anomalies Problems: Ch. 9: 1-31, pages 313-316

9 Course Package

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4. OPTIONS AND INDEX FUTURES (Montreal Exchange) -Call, Put, Straddle, Combinations -Transactions, Gains/Losses -Call and Put Option Valuation (Black and Scholes Model) -Put-Call Parity -Warrants and Rights and Executive Options -Futures and Forward Contracts -Stock Index Futures (S&P/TSX 60 Index Futures) -Program Trading and Portfolio Insurance Ch. 17: 1-20, pages 621 - 624 Problems: Ch. 18: 1-21, pages 663 - 665 Ch. 29: 1-13, pages 745 - 746 5.

17 and 18 Course Package 18 (Exclude 18.3 18.6)

19 (Exclude 19.5 19.9) 19.6

STOCK VALUATION AND FUNDAMENTAL ANALYSIS -Common Stock Valuation (Dividend Discount Model) 16 -P/E Ratio (Earnings Multiple) and Interest Rates 16.3 -PEG Ratio, P/B, P/S, P/Cash Flow, EV/EBITDA Course Package -Growth, Value, and GARP Investing -Financial Ratio Analysis and Dupont Equation 17.3 -Preferred Stock Valuation Course Package -Income Trusts Course Package -Industry Analysis 16.7 (page 553 -561) -Dividend Payment and Signalling Effect -Free Cash Flow and Corporate Valuation Course Package -Economic Indicators Course Package Problems: Ch. 16: 1-11, pages 562-563 Ch. 17: 1-6, page 606 BOND VALUATION, DURATION, AND INTEREST RATES -Short-Term (Money Market) Securities 13 -Bond Valuation and Yield -Term Structure of Interest Rates (Yield Curve) 14 -Riding the Yield Curve -Interest Rate Risk, Bond Duration and Immunization 15, and Appendix 15A -Interest Rates, Inflation, Taxes (Fisher and Darby Effects) Course Package Problems: Ch. 14: 1-10, pages 468-469 Ch. 15: 1-10, pages 505-507

6.

TAKE HOME MID-TERM EXAM: DUE: November 5, 2011

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7. PORTFOLIO MANAGEMENT AND CAPM Course Package -Efficient Portfolios - Markowitz Frontier 7.4 -Total Risk and Diversification 7 (Appendix 7A) -Capital Market Equilibrium and Implications (CAPM) 8 (8.1 -8.5) -Capital Market Line (CML) -Security Market Line (SML) 9 -Risk Measurement (Beta Coefficient and Market Model) - Adjusted Beta (Scholes/Williams, Dimson, Blume) -Fama/French Three-Factor Model, and Pastor/ Stambough Four-Factor model, 12.3 (page 392) -International Investing (Integration vs Segmentation) 23.2 (pages 880-896) Ch. 7: 1-12, pages 230-231 Problems: Ch. 8: 1-20, pages 267-269 Ch. 9: 1-12, pages 306 307 Ch. 23: 1-10, pages 882 883 8. PERFORMANCE MEASURES OF ACTIVELY-MANAGED PORTFOLIOS -Risk Adjusted Performance Measures of Funds 20.3 -Sharpes Measure (Sharpe Ratio) 20 -Treynors Measure Course Package -Jensens Measure (Alpha Values) - Information (or Appraisal) Ratio - M2 Measure (Franko and Leah Modigliani) Problems: Ch. 20: 1-15, pages 797-799
9.

MUTUAL FUNDS -Objectives and Asset Allocation -Risk Classification -NAVPS, Fees and Loads -Money Market Funds -Balanced Funds -Kinds of Equity Funds, Index Funds, ETFs -International and Emerging Market Funds -RRSP
-Dollar-Weighted, Time Weighted Returns and Dollar Cost Averaging (DCA) -Hedge Funds Ch. 4: 1-22, pages 118-119 Problems:

4.1- 4.5 Course Package 9.5 (page 307)

21.2 23.3

21.2 (pages 768 -779) Course Package

10. ARBITRAGE PRICING THEORY (APT) -Multi Factor Asset Pricing Model -Which Economic Factors? Problems: Ch. 8: 1-20, pages 276-278

8.6 - 8.11 8.10

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11. TECHNICAL ANALYSIS -Relative Strength -Momentum Index -Dow Theory -Contrary Opinion Theories -Breadth of Market -Confidence Index -Put/Call Ratio Problems: Ch. 11: 1-10, pages 375-376

Course Package 11.2 11.5

12. VALUATION OF SPECIAL SECURITIES -Warrants and Rights -Convertible Bonds -Dual Class Shares

Course Package

13. INVESTING IN GOLD -Trends of Gold Spot Prices -Gold as a Hedge -Gold Beta -Bre-X Debacle: A case of Salting

Course Package

REVIEW FOR FINAL EXAM

FINAL EXAM: TBA

Note: Students with disabilities or special needs are advised to contact Lauriers Special Needs Office for information regarding its services and resources. Students are encouraged to review the Calendar for information regarding all services available on campus.

BU 673

Fall 2011 Course Outline

APPENDIX A TRADING ON THE TORONTO STOCK EXCHANGE AND OTC BONDS MARKET Students should analyze available economic, financial and corporate data and make portfolio investment decisions using the latest published information. The trading starts on Monday, September 26, 2011 and ends on Thursday, November 25, 2011. Most of the rules and the relevant dates can be found on the BETA trading site <http://invest.wlu.ca/mba>. Observe all the trading rules at the website. Though the contact person in connection with the trading simulation is Lisa Fanjoy, at (519) 884-0710, extension 4106, she prefers that you contact her through the email address provided by the Simulation office. Try and save or all your daily trading information on spreadsheet. You will need that information for preparing your final report. A. B. C. The objective of the trading is to maximize your after tax wealth. Your beginning investment capital is $100,000. Trading begins on Monday, September 26, 2011 and continues until Thursday, November 25, 2011 when all securities will be sold or positions closed and the written Report should be submitted to me on the last day of class. On the last day of trading, the Simulation office will automatically liquidate all your stock, bond, and option securities at the market value without charging brokerage fees. The report should be 15 pages including all tables and appendices, typed double-spacing, plus one extra page of Executive Summary, making the report 16 pages, all inclusive. You are allowed to invest in Common and Preferred stocks, ETFs, XIU, Mutual Funds, Options, Equity Index Futures (m-x.ca), and Treasury bills. Uninvested cash allocation will automatically be put in T-bills with no brokerage fees. You are allowed to hold (long or short) a maximum of 5 index futures contracts and 5 index options contracts. There is a restriction on the number of options traded on the underlying stocks. Total put and call options positions on any stock should not exceed 20 contracts at any time. Remember to apply prudent investment principles such as diversification to manage your portfolio. For margin trading, normally the margin requirement is 50% and annual interest rate charged is prime + 1% on daily basis. The margin requirement for shorting stocks is about 150%. Each week, from the beginning of week three, not more than 10% of your portfolio should be put in near cash securities (e.g. T-Bill). This 10% near cash restriction is relaxed in the first two weeks of trading. Use asset allocation to achieve your diversification objective. The retail T-Bill rate earned will be slightly less than the wholesale rate reported in the newspaper. Assume a 50% Ontario marginal personal tax rate and that brokerage fees have to be paid to buy or sell securities. Assume that this is your only source of income for the year and, hence, your Federal tax rate will be decided by the amount of taxable income you make from the investment. Assume away the personal income tax exemption. No brokerage fee is charged on near cash securities, like T-Bill or bank deposit. The brokerage fees for options and futures/initial margin requirement are stated in the on-line Trading rules. The initial margin requirement for futures is also as stated in the trading rules.

D.

E. F.

G.

H.

I.

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INTERNET SITES FOR STOCK AND OPTION QUOTES

www.tsx.com (large caps) or www.tmx.com (Toronto Stock Exchange, large caps) www.m-x.ca (for options and index futures)

www.globeinvestor.com/servlet/Page/document/v5/data/bonds www.globeinvestor.com www.nyse.com www.nasdaq.com www.bloomberg.com www.yahoofinance.com

FOR CORPORATE FINANCIAL STATEMENTS

www.sedar.com Companys Internet Site

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APPENDIX B
Wilfrid Laurier University MBA National Competition

OVERVIEW: Colleges and universities across Canada use one of Lauriers computerized investment simulations in their classroom. The documentation, participation information and trading menus are all available from the website. The access code and password that are e-mailed to you once you have registered using the on-line registration form. The website can be found at: http://invest.wlu.ca/mba REFERENCES: All required documentation is available at the website. Please make sure that you read the reference material, as well as checking out all the links in the left hand menu, in particular the Bulletins, Dates and Rules. Make sure you check the Bulletins daily, as this is where current information and updates pertinent to the simulation will be posted. Also, ensure you read the following in the References section: Overview Reports The What? When? Why? And How? Timing When will my trade requests be processed? What do those ERRORS and NOTICES mean? Trading Stocks, Options, Futures and Bonds

PROCESSING OF TRADE REQUESTS:


Although website trading menus are always available, the Competition office does not process in the evenings, on weekends, or on statutory holidays. The documentation on Time When will my trade requests be processed? contains information regarding the processing of your trade requests.

QUESTIONS: If you are unable to find the answer to a question about the competition in the References or in one of the online bulletins, e-mail your questions and all relevant information, including your full name, school name, and access code and password to:
mbainfo@invest.wlu.ca

REGISTERING:
Step 1: Access the website at http://invest.wlu.ca/mba. Click on the left hand menu link that says Register. Complete the on-line form and submit. You MUST fill in the on-line form to register registration cannot be done in person or over the phone. Cost is $25 per team. Step 2: You may phone the (519) 884-0710, ext. 4448 to pay by credit card, or come to the office at 202 Regina St. N., second floor. The on-line registration MUST be completed and received before any payment can be accepted. PLEASE NOTE: For payment please do not call or visit the office until the first business day following your submission of the registration form. We require 24 hours to process the paper work associated with on-line registrations. Step 3: Once your payment is received, either by credit card or cheque/cash, your access code and password will be emailed to you within 24 hours. It cannot be immediately supplied to you. This also applies when paying in person. When completing your on-line registration form, please ensure you use an e-mail address that you have easy access to and/or is reliable, as this is the address that your access code and password will be sent to, as well as all other correspondence.

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ENTERING THE ACCESS CODE AND PASSWORD:

When you enter your access code remember that the first 4 characters are letters, all in lower case, followed by one or two numbers. When you enter your password remember that the password has 4 letters, all lowercase, with no numbers.
PLEASE ENSURE YOU KEEP YOUR ACCESS CODE AND PASSWORD CONFIDENTIAL!! Please check the DATES section on-line, to find out when your access code and password will expire.

IMPORTANT!!
The Summary Reports that are produced daily are not kept. It is not possible to access this information at a later date. If you feel you may need copies of these Summaries at a later date (to be used in your final report) PRINT THEM. They cannot be reproduced at the end of the simulation.

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APPENDIX C

INVESTMENT MANAGEMENT TRADING REPORT


(16 PAGES)

EXECUTIVE SUMMARY (One Page) INTRODUCTION OBJECTIVE ASSET ALLOCATION MACROECONOMIC & INDUSTRY SCENE TRADING STRATEGIES DIVERSIFICATION ECONOMIC RATIONALE FOR PICKING/SELLING STOCKS HEDGING/SPECULATION Using Options and Index Futures PORTFOLIO PERFORMANCE RETURNS OVER THE PERIOD RISK OF PORTFOLIO (Estimated Risk Measures) PERFORMANCE MEASURES vs S&P/TSX COMPOSITE INDEX TAXES LESSONS LEARNED FROM TRADING CONCLUSIONS APPENDIXES (Tables, Graphs, etc.)